Traders that were looking for a bounce play this morning got what they needed when the indices gapped down at Tuesday's opening bell. This time there was no pre-market recovery and there was actually another leg down when the first bounce attempt after the open failed. The price action was negative enough to finally produce the sort of wash-out that produces a tradable bottom.
What really helped to ramp up the pessimism was the ugly earnings reports from Caterpillar (CAT) and 3M (MMM) . That news gave the bears a reason to press their bets and to predict that the recent correction would go much deeper. With breadth close to 5 to 1, negative sentiment was extreme enough to produce a bounce.
The big question now is how much longer can this bounce continue? The indices are still down quite a bit and breadth is very poor with about 1900 gainers to 5300 decliners, but many stocks are well off the early lows.
I've talked quite a bit about the biotechnology sector lately. This is a good example of a group that has corrected much more than the broad market and is one of the first to bounce. At its low this morning the S&P 500 biotech ETF (XBI) was down over 20% which means it had hit 'bear market' territory. That seems to have triggered some bottom fishing in the group which has been a laggard for weeks.
Do we have a bottom in the indices that will now hold? At this point I'm approaching the market with the view that we are at a tradable low. We have some important earnings reports coming up from some FAANG names that could cause some problems, but I think we've seen enough selling so that we now have a workable low that will provide support. If there is a retest it could get ugly again fast but I think there will be some buying support.
This market still has plenty of work to do to return to health but its taken a couple of steps in the right direction today.
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